Sept. 10 (Bloomberg) -- Merck & Co.’s new top scientist is
planning major changes for the second-largest U.S. drugmaker,
including cutting dead-end research projects and focusing its
laboratories on biotechnology and cancer medicines.

Roger Perlmutter, Merck’s research and development chief,
outlined his plans at a dinner with analysts yesterday at the
Capital Grille steakhouse in downtown Manhattan. He replaced the
company’s previous research chief, Peter Kim, in April.

Perlmutter “told the R&D organization that ‘this is going
to be major surgery’ that ‘will take time to recover,’ but bring
forth a stronger organization,” Seamus Fernandez, an analyst
with Leerink Swann & Co. who was at the dinner, said in a note
to clients. “We believe a major restructuring announcement
within R&D (and likely the broader organization) is
inevitable.”

Merck had been too cautious and slow, and failed to focus
on new opportunities while rivals moved into biotechnology drugs
and away from primary care medicines, Perlmutter said, according
to the analysts. An R&D overhaul would come as Whitehouse
Station, New Jersey-based Merck is preparing for new competition
to its top product, the diabetes pill Januvia, which sold $4.09
billion last year.

A major problem at Merck Research Labs, as the company
calls its R&D division, is too much red tape and not enough
risk-taking, Perlmutter said, according to three analysts
present at the dinner.

Cutting Layers

“One of the things he noticed upon arriving at Merck was
how overly process-oriented it was,” Tim Anderson, an analyst
with Sanford C. Bernstein & Co., said today in a note to
clients. “He has been working hard to eliminate some of these
unnecessary administrative layers.”

Perlmutter, formerly the top scientist at Amgen Inc., the
world’s biggest biotechnology company by sales, began in June to
streamline Merck’s research-and-development structure, including
the elimination of a level of senior managers, Steve Cragle, a
Merck spokesman, said today in an e-mail today.

There were too many “science projects” where experimental
drugs that weren’t breakthroughs should have been canceled
instead of being allowed to go ahead, Perlmutter told the group
yesterday, according to Fernandez. Merck’s shares rose less than
1 percent to $47.98 at the close in New York. The stock has
gained 8.4 percent in the past 12 months.

New primary care drugs developed before Perlmutter took
over either haven’t been approved, or are likely to face limited
sales. Suvorexant, a sleep pill, in July wasn’t approved by U.S.
regulators at the two highest doses, and faces competition from
existing, widely used generic medicines. Odanacatib, an
experimental osteoporosis treatment, has been delayed while the
company conducts a second study.

Efficacy Emphasis

Perlmutter wants the R&D group to ask whether a drug works
well first, and next whether it’s safe enough to go ahead with
development. Before, there was too much emphasis on safety and
not enough on breakthrough science, he told the analysts.

“He would rather see efficacy as the main objective and
thinks that going down the safety route leads to too much risk-aversion,” Anderson said Perlmutter told the group.

Part of that risk-aversion may be a holdover from the drug
Vioxx, a painkiller Merck pulled from the market in 2004 after a
study showed it doubled the risk of heart attacks and strokes.
After consumers sued Merck, the company in 2007 set up a $4.85
billion settlement fund to make payments. The company also had
to pay $950 million to resolve civil claims and criminal charges
from the U.S. government for misbranding and make false claims
about its safety.

Biotechnology, Cancer

Perlmutter plans to move Merck away from primary care
medicines and put more emphasis on biotechnology drugs and
cancer therapies, Alex Arfaei, an analyst with BMO Capital
Markets Corp. who was at the dinner, said today in a note to
clients. “R&D will be more focused in terms of therapeutic
areas and products that the company will invest in.”

Merck is also looking to acquire experimental cancer
treatments, Perlmutter told the group, though it hadn’t seen a
large number of likely targets, Arfaei said.

The company has fewer on-market and experimental
biotechnology drugs than almost any other major pharmaceutical
company, said Anderson, who also attended the dinner. “It’s
exposure to biologics is too low.”

Perlmutter also will look to speed up experimental products
in vaccines and viral treatments, including the liver infection
hepatitis C and HIV, the analysts said.